Week 11 Preparation Questions Solutions

Week 11 Preparation Questions Solutions - ACCT1501 2011S1...

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ACCT1501 2011S1 Week 11 Preparation Questions Solutions Preparation Questions: Discussion Question 14.4, 14.5, 14.6, 14.9; Problem 14.4, 14.11; CASE 14A 4 To evaluate a company’s profitability the following ratios would be calculated: i Return on equity. ii Return on assets. iii Profit margin. iv Gross margin. v Cash flow to total assets. vi Earnings per share. vii Price to earnings ratio. viii Dividend payout ratio. ix Return on funds employed. 5 To evaluate a company’s turnover the following ratios would be calculated: i Total asset turnover. ii Inventory turnover. iii Debtors turnover. 6 To evaluate a company’s liquidity the following ratios would be calculated: i Current ratio. ii Quick ratio. 9 Main limitations of ratio analysis: i Future plans and expected results, not historical numbers, should be used in computing ratios, especially liquidity ratios. ii Current market values, not historical numbers, should be used for assets, debts and shareholders’ equity in computing performance ratios. iii Cash flow, not accounting profit, should be used in computing performance ratios. iv As stock markets and other capital markets adjust prices of companies’ securities as information becomes available, ratios based on publicly available information cannot tell you anything the markets have not already incorporate into security prices. v
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Week 11 Preparation Questions Solutions - ACCT1501 2011S1...

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